Showing papers in "Journal of Law Economics & Organization in 2015"
TL;DR: In this article, a new method to measure the ideology of state supreme court justices using campaign finance records is introduced. But the method is limited to the US Supreme Court and does not consider the role of the other branches of government.
Abstract: We introduce a new method to measure the ideology of state supreme court justices using campaign finance records. In addition to recovering ideal point estimates for both incumbent and challenger candidates in judicial elections, the method’s unified estimation framework recovers judicial ideal points in a common ideological space with a diverse set of candidates for state and federal oce, thus facilitating comparisons across states and institutions. After discussing the methodology and establishing measure validity, we present results for state supreme courts from the early-1990s onward. We find that the ideological preferences of justices play an important role in explaining state supreme court decision-making. We then demonstrate the greatly improved empirical tractability for testing separation-of-powers models of state judicial, legislative, and executive ocials with an illustrative example from a recent political battle in Wisconsin that ensnared all three branches.
68 citations
TL;DR: In this article, the impact of colleagues' votes on circuit judges' voting behavior was analyzed and it was found that each colleague's vote increases the likelihood that a judge will vote in the same direction by roughly 40 percentage points.
Abstract: Many empirical studies have found that circuit judges’ votes are significantly influenced by their panel colleagues. Although this influence is typically measured in terms of colleagues’ characteristics, this article argues that it is better understood as an effect of colleagues’ votes. Applying the latter interpretation, this article reanalyzes 11 prior studies of panel voting, as well as three novel data sets, and reveals the impact of colleagues’ votes to be strikingly uniform. In almost every type of case, each colleague’s vote increases the likelihood that a judge will vote in the same direction by roughly 40 percentage points. This result is consistent with a strong norm of consensus and can account for nearly all of the perceived impact of colleagues’ party, gender, and race. This finding raises questions about strategic and deliberative models of panel voting and helps clarify measurement issues regarding the relationship between judicial characteristics and voting behavior (JEL C31, K40).
55 citations
TL;DR: This article found that small municipalities pay a significant price premium for franchisee-provided water when compared with publicly provided water; in contrast, large municipalities do not pay a premium on average.
Abstract: Williamson’s 1976 study of natural-monopoly franchise bidding launched extensive debate concerning the degree to which transaction-cost problems afflict government franchising. We propose that municipalities vary in ability to discipline franchisees, and that this heterogeneous ability affects franchise renewal patterns and the quasi-rents that franchisees extract. We study provision of municipal water services in France, a setting characterized by both direct public provision and franchised private providers. We find that small municipalities pay a significant price premium for franchisee-provided water when compared with publicly provided water; in contrast, large municipalities do not pay a premium on average. Further, large municipalities are less likely to renew an incumbent franchisee that charges an "excessive" price, while small municipalities’ renewal patterns are not influenced by franchisees’ excessive pricing. We interpret the results as evidence that although large municipalities can discipline franchisees and thus prevent extraction of quasi-rents, small municipalities are less able to do so due to weaker outside options. (JEL: H0, H7, K00, L33)
51 citations
TL;DR: In this article, the authors analyzed the effect of deterministic deterrence schemes and their impact on stealing and found that when deterrence incentives first exist and are removed later on, subsequent behavior is more selfish than without this deterrence history.
Abstract: This study analyzes deterrence schemes and their impact on stealing. The results confirm Becker’s deterrence hypothesis. Moreover, crowding out of pro-social behavior occurs due to deterrence incentives: when deterrence incentives first exist and are removed later on, subsequent behavior is more selfish than without this deterrence history. This study offers evidence that (part of this) crowding out takes place via change of emotions. Without deterrence incentives in place, in a variant of the dictator game, players with pro-social emotions steal less. When players face expected punishment, pro-social emotions are deactivated and do not decrease stealing; in this case, self-centered emotions get activated and motivate greater stealing. This study provides support for theories on emotions in behavioral criminal law and economics and offers new insights for deterrence policy. (JEL C91, D63, K42)
43 citations
TL;DR: In this article, the authors argue that the structure of institutions meant to control corruption should vary across autocratic regimes and explain why unaccountable governments vary in their willingness to create anticorruption institutions.
Abstract: Corruption is usually depicted in one of two ways: as stemming from a lack of government accountability, or from a lack of capacity. Neither depiction predicts that the structure of institutions meant to control corruption should vary across autocratic regimes. If corruption results from moral hazard between politicians and citizens, then all unaccountable governments should eschew anticorruption bodies. If rent-seeking stems from moral hazard between politicians and bureaucrats, all governments should create anticorruption bodies. We offer an explanation for why unaccountable governments vary in their willingness to create anticorruption institutions. Autocrats create such bodies to deter ideologically disaffected members of the populace from entering the bureaucracy. Anticorruption institutions act as a commitment by the elite to restrict the monetary benefits from bureaucratic office, thus ensuring that only zealous supporters of the elite will pursue bureaucratic posts. We illustrate these arguments with case studies of South Korea and Rwanda. (JEL D73, P48)
43 citations
TL;DR: In this article, the authors document evidence of corruption in Chinese state asset sales and provide evidence that aggregate ownership transfers improve profitability, though not in cases where the transfers themselves were corrupted.
Abstract: We document evidence of corruption in Chinese state asset sales. These sales involved stakes in partially privatized firms, providing a benchmark—the price of publicly traded shares—to measure underpricing. Underpricing is correlated with deal attributes associated with misgovernance and corruption. Sales by "disguised" owners that misrepresent their state ownership to elude regulatory scrutiny are discounted 5–7 percentage points more than sales by other owners; related party transactions are similarly discounted. Analysis of subsequent operating performance provides suggestive evidence that aggregate ownership transfers improve profitability, though not in cases where the transfers themselves were corrupted. (JEL D73, G30, L33).
38 citations
TL;DR: In this paper, the authors present results from a laboratory experiment studying the channels through which different law enforcement strategies deter cartel formation, showing that the main determinant of deterrence is the fear of partners deviating and reporting.
Abstract: This article presents results from a laboratory experiment studying the channels through which different law enforcement strategies deter cartel formation. With leniency policies offering immunity to the first reporting party, a high fine is the main determinant of deterrence, having a strong effect even when the probability of exogenous detection is zero. Deterrence appears to be mainly driven by "distrust"; here, the fear of partners deviating and reporting. Absent leniency, the probability of detection and the expected fine matter more, and low fines are exploited to punish defections. The results appear relevant to several other forms of crimes that share cartels’ strategic features, including corruption and financial fraud. (JEL C92, D03, K21, K42, L41.)
36 citations
TL;DR: In this article, the authors empirically investigated the relation between vertical integration and video game performance in the U.S. video game industry and found that vertically integrated games produce higher revenues, sell more units and sell at higher prices than independent games.
Abstract: This paper empirically investigates the relation between vertical integration and video game performance in the U.S. video game industry. For this purpose, we use a widely used data set from NPD on video game montly sales from October 2000 to October 2007. We complement these data with handly collected information on video game developers for all games in the sample and the timing of all mergers and acquisitions during that period. By doing this, we are able to separate vertically integrated games from those that are just exclusive to a platform First, we show that vertically integrated games produce higher revenues, sell more units and sell at higher prices than independent games. Second, we explore the causal effect of vertical integration and find that, for the average integrated game, most of the difference in performance comes from better release period and marketing strategies that soften competition. By default, vertical integration does not seem to have an effect on the quality of video game production. We also find that exclusivity is associated with lower demand.
32 citations
TL;DR: The authors examined the association between the legality of independent expenditures and antitakeover lawmaking in the US states and found that allowing independent expenditures may create additional agency costs for owners through public policy.
Abstract: We test the agency theory of corporate political activity by examining the association between the legality of independent expenditures and antitakeover lawmaking in the US states. Exploiting changes in state law regarding the use of corporate independent expenditures in the pre-Citizens United era, we estimate that a state is more likely to pass antitakeover statutes that entrench management when firms are allowed to make independent expenditures. We also find that this relationship is conditional on the competitiveness of a state’s electoral environment, suggesting that the threat of independent expenditures may move vulnerable legislators’ votes on less salient issues, such as corporate governance. These findings are robust to competing public interest and political economy explanations for antitakeover lawmaking, and they reveal that allowing independent expenditures may create additional agency costs for owners through public policy. Finally, these results strongly challenge the claim that state-level antitakeover laws are exogenous to firms’ activities. (JEL D72, G38, K20)
26 citations
TL;DR: The authors found that relative to whites, black employment and labor force participation rise, and the black unemployment rate falls, during the tenure of black mayors and that black mayors also lead to higher black incomes relative to white incomes.
Abstract: To what extent do politicians reward voters who are members of their own ethnic or racial group? Using data from large cities in the United States, we study how black employment outcomes are affected by changes in the race of the cities’ mayors between 1973 and 2004. We find that relative to whites, black employment and labor force participation rise, and the black unemployment rate falls, during the tenure of black mayors. Black employment gains in municipal government jobs are particularly large, which suggests that our results capture causal effects of black mayors. Black mayors also lead to higher black incomes relative to white incomes. We show that our results continue to hold when we compare the treated cities to alternative control groups of cities, explicitly control for changing attitudes towards blacks or use regression discontinuity analysis to compare cities that elected black and white mayors in close elections. (JEL D7, H7, J7)
26 citations
TL;DR: This article developed a formal economic model of legislative-judicial interaction to predict the circumstances in which Congress will and will not change judicial decisions and showed that congressional inaction is not a sign of acceptability by a majority of legislators.
Abstract: Traditional law and economic analysis has focused on legal rules directly related to the allocation of resources. Today, economic analysis is being used to examine more traditional legal issues. This article explores one such traditional legal issue by applying economic methodology to the legislative-judicial interaction or "bargaining game." The purpose of this article is to determine the impact of judicial interpretation on regulatory legislation. Most studies of the political economy of regulation have focused on elected politicians (e.g., Congressmen), ignoring the role of the courts. Yet, judges interpret the law and may, in the extreme, reverse legislative decisions. Studying the influence of the judiciary on the legislature’s regulatory decisions remains an unexplored but important issue. The model allows us to address a variety of issues central to national policy making, for example, how the court influences legislative choices. We focus on an issue raised in the legal literature and in judicial opinions. Suppose a regulatory statute has been altered or reinterpreted by the courts, and we then observe that Congress does not act to change the court ruling. What can we infer from this lack of action? Many prominent political and legal scholars conclude that this inaction indicates acceptability by a majority of legislators. Because there exists no analytical foundation for assessing how judicial decisions affect legislative decision making over regulatory issues, however, such conclusions rest on questionable assumptions. The purpose of this article is to develop a formal economic model of legislative-judicial interaction. The model allows us to predict the circumstances in which Congress will and will not change judicial decisions. The model shows that congressional inaction is not a sign of acceptability by a majority of legislators. Instead, congressional inaction is a consequence of congressional structure and procedures: committees play an important role here, as does bicameralism. This model will be used to explore and explain the legislative events surrounding the Supreme Court decision Grove City College v. Bell (1984), a case involving statutory interpretation and the Department of Education’s regulatory provisions prohibiting sex discrimination. (JEL D72, D78, K00, K40, Z18)
TL;DR: In this article, the roles of information sharing and in-group punishment in sustaining group reputation and increasing gains from trade were investigated, and it was shown that the presence of ingroup punishment encourages cooperation early on, and information sharing reinforces this behavior over time.
Abstract: When individuals trade with strangers, there is a temptation to renege on contracts. In the absence of repeated interaction or exogenous enforcement mechanisms, this problem can impede valuable exchange. Historically, individuals have solved this problem by forming institutions that sustain trade using group, rather than individual, reputation. Groups can employ two mechanisms to uphold reputation that are generally unavailable to isolated individuals: information sharing and in-group punishment. In this paper, we design a laboratory experiment to distinguish the roles of these two mechanisms in sustaining group reputation and increasing gains from trade. We nd that information sharing encourages path dependence via group reputation; good (bad) behavior by individuals results in greater (fewer) gains from exchange for the group in the future. However, the mere threat of in-group punishment is enough to discourage bad behavior, even if punishment is rarely employed. When combined, information sharing and in-group punishment work as complements; the presence of ingroup punishment encourages cooperation early on, and information sharing reinforces this behavior over time.
TL;DR: In this article, the authors present a tractable framework for studying frictionless matching in education and labor markets when individuals have heterogeneous communication and cognitive skills and invest discretely more in education than marginally different individuals who become workers.
Abstract: This article presents a tractable framework for studying frictionless matching in education and labor markets when individuals have heterogeneous communication and cognitive skills. In the model, there are gains to specialization and team production, but specialization requires communication and coordination between team members. Individuals accumulate cognitive skills in schools when young. As adults, they decide whether to work as a manager or a worker in a firm or become a teacher in a school. Individuals with more communication skills will become either managers or teachers and earn higher wages. Each manager manages several workers and each teacher teaches several students, with their span of control being determined by their communication skill. These individuals also invest discretely more in education than marginally different individuals who become workers. Equilibrium is equivalent to the solution of an utilitarian social planner solving a linear programming problem.
TL;DR: This work calibrates a model of optimal ACO incentives using proprietary performance measures from a large insurer and finds that free-riding is a severe problem and causes optimal incentive payments to exceed cost savings unless ACOs simultaneously achieve extremely large efficiency gains.
Abstract: Accountable Care Organizations (ACOs) are new organizations created by the Affordable Care Act to encourage more efficient, integrated care delivery. To promote efficiency, ACOs sign contracts under which they keep a fraction of the savings from keeping costs below target provided they also maintain quality levels. To promote integration and facilitate measurement, ACOs are required to have at least 5000 enrollees and so must coordinate across many providers. We calibrate a model of optimal ACO incentives using proprietary performance measures from a large insurer. Our key finding is that free-riding is a severe problem and causes optimal incentive payments to exceed cost savings unless ACOs simultaneously achieve extremely large efficiency gains. This implies that successful ACOs will likely rely on motivational strategies that amplify the effects of under-powered incentives. These motivational strategies raise important questions about the limits of ACOs as a policy for promoting more efficient, integrated care (JEL D23, D86, I12, L14, L24, M52).
TL;DR: In this article, the authors empirically investigate the effects of subcontracting on procurement auction prices in Italy and find that fully qualified firms in a position to choose whether to subcontract generally offer lower prices than partially qualified firms, which must proceed with mandatory subcontracts.
Abstract: Using a newly assembled dataset, we empirically investigate the effects of subcontracting on procurement auction prices in Italy. In this setting, the pre-qualifications required for firms aiming to bid on public contracts determine the firms’ different subcontracting formats. We find that fully qualified firms in a position to choose whether to subcontract generally offer lower prices than partially qualified firms, which must proceed with mandatory subcontracts. This result indicates that the firms’ voluntary arrangements tend to improve market performance, while imposed arrangements tend to worsen market performance, in the public procurement supply-chain. (JEL H57, L23, L24, D44)
TL;DR: In this article, the authors explore organizational responses to costly activities aimed at persuading decision makers and provide a theory of the inordinate activities based on ex-post ine¢ ciencies.
Abstract: This paper explores organizational responses to in‡uence activities - costly activities aimed at persuading decision makers. As Milgrom and Roberts (1988) argued, rigid practices that otherwise seem ine¢ cient can optimally arise. If more complex decisions are more susceptible to in‡uence activities, optimal selection may partially account for the observed correlation between …rm performance and management-practice quality reported in Bloom and Van Reenen (2007). Further, a …rm’s boundaries can be shaped by in‡uence-activity considerations, providing a theory of the …rm based on ex-post ine¢ ciencies. Finally, boundaries and rigid practices interact: rules under non-integration should be less restrictive than under integration. (JEL D02, D23, D73, D83)
TL;DR: In this article, the authors explore the ramifications of the Vetogates model of the legislative process and explore the potential benefits of such a model for legal doctrine, suggesting the virtue of judicial consultation of legislative history in statutory cases.
Abstract: In this article, I explore the ramifications of a vetogates model of the legislative process. The vetogates model focuses on the many points in the legislative process where proposed legislation can be stopped (vetoed). A political system where statutes must pass through a variety of filters, each motivated by somewhat different incentives and interests, is one where (1) statutes are hard to enact; (2) statutes that are enacted will tend to have compromises, logrolls, and delegations; and, (3) once enacted, statutes are hard to repeal. These consequences represent a significant cost of the vetogates model to our system of governance, but they also carry some potential benefits. I explore the ramifications of the vetogates model for legal doctrine. For example, the vetogates model supports judicial consultation of legislative history in statutory cases and suggests the virtue of deliberation-rewarding canons for judicial review of agency statutory interpretations.
TL;DR: In this article, the authors argue that judicial systems that limit policy-making authority also discourage the politicization of courts, encouraging judges to think narrowly about the interests of litigating parties.
Abstract: How does a court’s policy-making authority shape the nature of judicial behavior? We argue that judicial systems that limit policy-making authority also discourage the politicization of courts, encouraging judges to think narrowly about the interests of litigating parties. In contrast, granting a court high policy-making authority—affecting potentially thousands of cases and other branches of government—naturally encourages judges to consider broader ideological principles. Typically, unraveling cause and effect would be difficult, as judicial behavior and institutions are usually stable and endogenous. But an especially stark sequence of political and institutional changes in Brazil affords analytic leverage to explore these questions. A series of judicial reforms greatly expanded the Brazilian Supreme Court’s authority, and our analysis of judicial decisions shows the emergence of a political cleavage on the court after these reforms.
TL;DR: In this paper, the internal politics of a licensing association with regard to expansion of the licensure and self-regulation is studied, and a theoretical model is presented of a professional association that has the power to restrict entry, and yet a majority of its members may prefer to allow entry, even when doing so reduces the total revenue of their members.
Abstract: This article studies the internal politics of a licensing association with regard to expansion of the licensure and self-regulation. A theoretical model is presented of a professional association that has the power to restrict entry, and yet a majority of its members may prefer to allow entry, even when doing so reduces the total revenue of its members. This may happen due to a conflict of interest among professional sub-specialties. On the other hand, the model predicts no heterogeneity of interests within the association regarding self-regulation. (JEL J44)
TL;DR: This paper proposed that worker responses to marginal pay-for-performance changes can be related to their response to a measure of taxes, and suggested a short run elasticity of output with respect to incentive pay for high earners in the United States of 0.25 or lower, and it is difficult to rule out very low responsiveness.
Abstract: Empirical evidence on the effect of pay-for-performance on output has been scarce. We propose that worker responses to marginal pay-for-performance changes can be related to their response to a measure of taxes. Using this approach, we suggest a short-run elasticity of output with respect to incentive pay for high earners in the United States of 0.25 or lower, and it is difficult to rule out very low responsiveness. (JEL J33, H24)
TL;DR: Using civil appeals data on Taiwan's Supreme Court (TSC), this paper revisited the well-known question of whether the "haves" come out ahead in litigations.
Abstract: Using civil appeals data on Taiwan’s Supreme Court (TSC), this article revisits the well-known question of whether the "haves" come out ahead in litigations. We first show that the higher-status litigants indeed mobilized stronger legal representation and obtained more victories than the lower-status litigants. However, we submit that that the party capability theory cannot fully explain the advantages the "haves" enjoyed over the "have-nots." Further analysis reveals that the TSC’s exercise of discretionary jurisdiction also played an important role by strongly favoring the governmental litigants at the agenda-setting stage. We argue that the TSC’s preference in this regard was induced by the TSC judges’ self-identification as part of government. In conclusion, our empirical investigation shows that both party capability and court preference contribute to influence the outcomes of appeals. (JEL K4)
TL;DR: This paper investigated a repeated employment relationship between a principal and a team of agents hired to solve a series of problems and showed that a simple mixture of an individual and team bonus constitutes the optimal relational contract under joint performance evaluation.
Abstract: This article investigates a repeated employment relationship between a principal and a team of agents hired to solve a series of problems. With non-verifiable output, rewarding agents based on team performance can relax the principal’s credibility constraint by smoothing bonus payments over time. Team incentives also induce free-riding, but the principal prefers them to individual incentives if effort costs are relatively high and problems difficult to solve. We show that a simple mixture of an individual and team bonus constitutes the optimal relational contract under joint performance evaluation. The optimal contract may be inefficient when team size is endogenous, as rewarding team performance forces the principal to share surplus with agents, but may allow him to motivate a larger group. (JEL L14, M52).
TL;DR: In this article, the authors examined the effects of the lack of incentives for on-time delivery on competitive bids for a fixed-price procurement contract and analyzed the effect of liquidated damages aimed at protecting the buyer for the expected losses due to project delays.
Abstract: Time overruns are common in public projects and are not confined to inherently complex tasks. One explanation is that sellers can undergo changes in production costs which generate a value of waiting. Using the real-option approach, we examine the effects of the lack of incentives for on-time delivery on competitive bids for a fixed-price procurement contract. Next, we analyze the effects of liquidated damages aimed at protecting the buyer for the expected losses due to project delays. We show that when the expectation damage measure fails to discourage time overruns, a liquidated damages stipulation does not lead to a Pareto superior outcome. Although liquidated damages tend to make the seller better off, the buyer’s expected payoff is lower than when the contract does not provide for any damages for breach. (JEL C61, D44, D86, K12)
TL;DR: In this article, the authors provide an experimental investigation of third parties' sanctioning behavior, in order to understand whether public officials (e.g., judges, politicians, or regulators) are sensitive to bottom-up pressure on the part of ordinary citizens, who are the major victims of wrongdoers' behavior.
Abstract: This article provides an experimental investigation of third parties’ sanctioning behavior, in order to understand whether public officials (e.g., judges, politicians, or regulators), when deciding about top-down interventions aimed at punishing wrongdoers, are sensitive to bottom-up pressure on the part of ordinary citizens, who are the major victims of wrongdoers’ behavior. We set up a novel five-treatment design and compare situations where a wrongdoer acts under: (1) no third-party punishment; (2) nonaccountable third-party punishment; and (3) accountable third-party punishment. We show that when citizens are active and make their voice heard, public officials sanction wrongdoing significantly more. Our experimental finding complements previous empirical work based on field data and suggests that when third-party institutions are held accountable, their propensity to fight misconduct is higher, other things equal. We view this result as good news with regard to domains where it implies that pro-consumer policies will be more likely (e.g., regulatory policies). The risk of pandering by elected officials and the danger of poorly informed decisions by the citizens are the flip side of the argument. (JEL C91, D02, D63, D72, K00)
TL;DR: This paper explored possible biases in open peer-review using data from the English superior courts and found that reviewers are reluctant to reverse the judgments of reviewees with whom they are about to interact, and that this effect is stronger when reviewer and reviewee share the same rank.
Abstract: This paper explores possible biases in open peer-review using data from the English superior courts. Exploiting the random timing of on-the-job interaction between reviewers and reviewees, we find evidence that reviewers are reluctant to reverse the judgments of reviewees with whom they are about to interact, and that this effect is stronger when reviewer and reviewee share the same rank. The average bias is substantial: the proportion of reviewer affirmances is 30% points higher in the group where reviewers know they will soon work with their reviewee, relative to groups where such interaction is absent. Our results suggest reforms for the judicial listing process, and caution against recent trends in performance appraisal techniques and scientific publishing. (JEL A12, C21, K40, Z13)
TL;DR: In this article, the authors developed a theory of contracting among founders of a new firm and derived a trade-off between upfront contracting and delayed contracting, which can result in ineffective founders, versus delayed contracting which can enable some founders to appropriate ideas and start their own firms.
Abstract: This paper develops a theory of contracting among founders of a new firm. It asks at whatstage founders agree to commit to each other, how they structure optimal founder contracts, and how this affects team formation, ownership, incentives, and performance. The paper derives a trade-off between upfront contracting, which can result in teams with ineffective founders, versus delayed contracting, which can enable some founders to appropriate ideas and start their own firms. Delayed contracting becomes more attractive when there are significant doubts about the skills of founders. Contingent contracts with vesting of shares may be used to mitigate inefficiencies in the team formation process. Interestingly we show that outside investors cannot easily undo ex-post inefficient founder agreements. We also show that laws that provide protection to implied partnerships may have the unintended effect of encouraging more formal contracting.
TL;DR: In this paper, the authors study whether producers' up-front investments can help sustain relations with business partners and show that the initial investment combined with the business partner's threat to terminate the contract before it expires can generate a bonding mechanism that precludes the producer from behaving opportunistically.
Abstract: This article studies whether producers’ up-front investments can help sustain relations with business partners. The initial investment combined with the business partner’s threat to terminate the contract before it expires can generate a bonding mechanism that precludes the producer from behaving opportunistically. I test this view using franchise contract data and a natural experiment. In practice, the franchisor (business partner) determines how much a franchisee (producer) needs to invest up-front. I show that franchisors affected by the passing of a law that restricts their ability to terminate misbehaving franchisees ask their franchisees for higher up-front investments. This result is particularly large for small franchise systems, as franchisees’ investments are less redeployable in case of contract termination. The data suggest that contractual up-front investments can be used to sustain business relations (JEL L14, K20, M21).
TL;DR: The socially optimal level of entrepreneurship will nevertheless be achieved if clients, employers, and workers can renegotiate these restrictive employment contracts and make compensating transfers as mentioned in this paper, and governments can increase welfare by limiting enforcement of these contracts.
Abstract: Client relationships create value, which employees may try to wrest from their employers by establishing their own firms. If an employer and worker cannot contract on the output and profits of the worker’s prospective new firm, at the beginning of their relationship the employer induces the worker to sign a contract that prohibits him from competing or soliciting the current client in the event of termination of employment. The socially optimal level of entrepreneurship will nevertheless be achieved if clients, employers, and workers can renegotiate these restrictive employment contracts and make compensating transfers. If workers cannot finance transfers to employers, however, employers and workers will sign contracts that are too restrictive and produce too little entrepreneurship, and governments can increase welfare by limiting enforcement of these contracts. With or without liquidity constraints, locations where noncompete contracts are less enforced will attract more clients and have higher employment and output. (JEL K12, L26, R10)
TL;DR: For example, this article found that the increase in per pupil expenditures over the past several decades is largely the product of growth in personal incomes and a decline in the relative size of the cohort of school-age children, and not of court-ordered finance reforms.
Abstract: Beginning with Serrano v. Priest in 1971, equity-based decisions issued by state supreme courts led to a decrease in cross-district inequality in per pupil expenditures. In subsequent years, more state supreme courts overturned existing systems of public school finance for failing to provide adequate education to students living in poor school districts. Adequacy-based decisions have not produced measurable changes in cross-district inequality in expenditures, but have led to higher overall levels of funding for public education. The nationwide increase in per pupil expenditures over the past several decades is, however, largely the product of growth in personal incomes and a decline in the relative size of the cohort of school-age children, and not of court-ordered finance reforms. In California, after Serrano and the most far-reaching equalization reforms implemented anywhere in the country, the association between the wealth of a school district and educational quality remains strong and persistent. If one’s concern is the quality of education that students receive and not the amount of money spent on them, the victories that reformers have won in the courts have been hollow victories.
TL;DR: In this article, the authors argue that the traditional explanation neglects a central aspect of the major transformations in American regulatory politics during the past half century, the critical role of Congress and the President in the reformation of both the American regulatory state and administrative law.
Abstract: The archetype of the New Deal agency, exercising neutral, technocratic expertise, is no longer tenable. As Richard Stewart (1975. "Reformation of Administrative Law," 88 Harvard Law Review 1667–813) noted 35 years ago, administrative law "is undergoing a fundamental transformation." Following Stewart, the modern explanation in legal scholarship of the transformation is that federal judges came to the rescue of the administrative state, actively intervening in the regulatory process in order to preserve key values which had been threatened by an admixture of internal pathologies and external (read: "political") threats. We argue that the traditional explanation neglects a central aspect of the major transformations in American regulatory politics during the past half century—the critical role of Congress and the President in the reformation of both the American regulatory state and administrative law. The traditional explanation in legal scholarship, that courts implemented values and agendas separate from legislative aims, and hence separate from politics, is flawed because it neglects the larger transformations, beginning in the 1960s and continuing over the next two decades, in American national politics. During this period, a wide range of new constituencies arose, including the environmentalists, consumerists. The courts’ role in the reformation must be seen in this broader political transformation of the 1960s and 1970s rather than in a court-centric perspective in isolation from the rest of the political system. We illustrate our thesis with nuclear power regulation, which demonstrates the critical, joint roles of entrepreneurs in Congress and the courts.